4 CEOs Who Are Making Frugal Innovation Work

In 2004, the French car maker Renault launched Logan, a no-frills sedan priced at €5,000 euros ($6,000). Initially destined for emerging markets, the low-cost car became a huge hit in Western Europe where, due to the recession, budget-conscious consumers had begun seeking affordable products that deliver greater value for money. Sensing an opportunity, Carlos Ghosn, CEO of the Renault-Nissan Alliance (a strategic partnership between Renault and Nissan), launched the development of a whole new product line of entry-level vehicles under the Dacia brand.

Dacia is now the fastest-growing car brand in Western Europe (including in the demanding German market). Renault’s entry-level products, mostly sold under the Dacia brand, have become the carmaker’s cash cow, representing over 40% of the auto company’s global sales in 2013, compared with 20% in 2008. These products also yield greater than average margins for Renault due to a strict no-discounts retail policy. Even better, Dacia products are eco-friendly: 95% of the components in every Dacia are recyclable.

With the successful launch of the Logan — and subsequently other Dacia-branded vehicles — Renault has created an entirely new segment of vehicles in the automotive industry that combine quality and affordability. Although its Western rivals such as Volkswagen plan to launch their own low-cost brands, Renault is potentially years ahead in the art and science of frugal innovation.

As we describing in our forthcoming book, Frugal Innovation (to be published by The Economist in association with Profile Books and Public Affairs), frugal innovation is a disruptive growth strategy that aims to create significantly more business and social value while drastically reducing the use of scarce resources such as energy, capital, and time. Long practiced by companies in complex and resource-constrained emerging markets like India and China, frugal innovation is now being adopted by pioneering Western companies to address the needs of cost-conscious and eco-aware consumers in developed economies.

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Frugal innovation is not just about doing more with less but about doing better with less. It is about creating meaningful products and services that integrate four core attributes highly valued by Western consumers: affordability, simplicity, quality, and sustainability.

Frugal innovation challenges the traditional “more for more” business model of Western companies which pump billions of dollars into R&D, use lots of natural resources to crank out complex, expensive products, and charge customers ever more for new features. But this “bigger is better” approach to innovation is running out of steam for two key reasons. First, increasingly budget-constrained American and European consumers no longer want over-engineered and costly products. And second, natural resources like water, minerals and wood are growing more expensive and scarce.

The bloated Western innovation model is not only wasteful and out of sync with market realities, but it is also failing to live up to its promise of bringing social progress and improving the wellbeing of citizens. A case in point is the wasteful U.S. healthcare system where costs keep escalating even while patients increasingly fail to get good value.

It’s time for CEOs in Western companies to emulate Carlos Ghosn and adopt the principles of frugal innovation to bring greater value to customers — and society at large — faster and better while using fewer resources. And in order to do this effectively, CEOs will need to create frugal organizations — by driving systemic structural and cultural changes. CEOs seeking to build frugal organizations can find inspiration from three other farsighted CEOs who are boldly overhauling their company’s innovation engine with the goal of doing better with less.

Andrew Witty, CEO, GlaxoSmithKline (GSK): saving lives with agile R&D. When he took over as CEO of GSK in 2008, the then 43-year-old Witty resolved to overhaul the pharma giant’s R&D strategy, structure and culture. The focus was very much on how to re-organize and put processes in place to increase the firm’s agility and responsiveness to new opportunities. The strategy became one of breaking up big-ticket R&D programs (it costs over $1 billion to launch a new drug). Instead of investing all R&D resources in a few big high-risk/high-reward projects, the focus was to invest — like venture capitalists do — in many smaller, promising projects that could eventually be tapered. In this way, Witty hoped to turn GSK into “a nimble fleet of destroyers, rather than two or three vulnerable battleships,” thus reducing the exposure to “sudden torpedoes” like lawsuits and regulatory crackdowns. Witty then went on to revamp a monolithic structure by breaking down silos and reducing bureaucracy. Finally, he tackled GSK’s R&D culture, which had begun to look like that of a police state. Specifically, he led a transformation away from an excessively regimented approach towards a simpler culture that trusted and empowered staff to do the right thing. Under Witty’s leadership, GSK is becoming an agile enterprise that is frugal with time — a scarce and valuable resource in the pharmaceutical sector where every day saved in the R&D cycle means a day saved in patients’ lives.

John Fallon, CEO, Pearson: improving learning with greater efficacy. Picking up in 2013 from where his predecessor Marjorie Scardino had left off, John Fallon has focused Pearson’s efforts on revamping its business model from selling books to selling digital educational services. The company’s new strategy is built around one core objective: efficacy, or showing measurable results from learning. This strategy is intrinsically frugal: it shifts the focus from inputs (designing and delivering educational content, tools and services) to outcomes (measurable impact on learners). And this in turn forces Pearson to do more with less — that is, deliver more rapidly the highest impact and value for its learners while maximizing the value of its educational assets. To realize this strategy, Fallon has created an organization-wide community with regional champions who embed efficacy into the company’s various activities. For instance, if a U.S. team is building a new product, the regional champion ensures that the team keeps student needs in mind at all times. (This might be done by making sure that the course will increase students’ employability.) In just over three years, this community, working with the leadership team, has had a significant impact on the 40,000-strong company.

Paul Polman, CEO, Unilever: delivering sustainable value to 4 billion consumers. In 2010, the no-nonsense CEO of Unilever unveiled Sustainable Living Plan, a daring strategy to double the company’s revenues to 80 billion euros while halving its environmental impact by 2020. Since 2010, the company has deeply embedded sustainability — and social inclusion — into all its core activities. For instance, its R&D has created high quality products that combine affordability — like small detergent packages with just five washes now sold in Spain — and sustainability, like soaps that kill germs faster and better with less water. Its supply chain group is making Unilever’s global value chain — made up of 260 factories and 460 warehouses in 90 countries — less wasteful and more energy efficient. And its purchasing and sales teams strive to improve the livelihoods of 500,000 smallholder farmers and distributors that the company works with worldwide. Through all these efforts Unilever is building a frugal innovation engine that can profitably serve 4 billion consumers by 2020 in a socially and environmentally responsible way.

Ghosn, Witty, Fallon, and Polman are enlightened leaders who are inculcating a frugal innovation culture in their organizations in order to generate greater business and social value faster, better, and cost-effectively. By learning to do better with less, these pioneering CEOs are rewriting the rules of the game — and even shifting the game completely — in their respective industries.

Navi Radjou is a Silicon Valley-based innovation and leadership advisor. A TED speaker and winner of the 2013 Thinkers50 Innovation Award he is the coauthor (with Jaideep Prabhu and Simone Ahuja) of Jugaad Innovation (Wiley 2012). His latest book (with Jaideep Prabhu) is Frugal Innovation (The Economist in association with Profile Books and Public Affairs, 2015).

Jaideep Prabhu is Professor of Marketing at Cambridge Judge Business School. He is the co-author of Jugaad Innovation: Think Frugal, Be Flexible, Generate Breakthrough Growth, described by The Economist as “the most comprehensive book yet” on the subject of frugal innovation. His most recent book, Frugal Innovation, won the CMI’s Management Book of the Year Award 2016.